Does Corporate Performance Improve After Acquisitions? A Case of Indian Companies
Duppati, G. R. (2012). Does Corporate Performance Improve After Acquisitions? A Case of Indian Companies (Thesis, Doctor of Philosophy (PhD)). University of Waikato, Hamilton, New Zealand. Retrieved from http://hdl.handle.net/10289/6728
Permanent Research Commons link: http://hdl.handle.net/10289/6728
This thesis examines the results of merger and acquisition (M&A) activities of Indian corporates related to Outward Foreign Direct Investment (OFDI). The key issue is the extent to which these M&As create value for the shareholders of the Indian acquiring firms. There are two components to this question relating to the short and longer term impacts. First, how does the market react to the announcements of OFDI related M&As by Indian corporates in the short term? and second, how successful are the Indian companies in creating value to the shareholder in the long run? The research further considers the firm specific level using a sample of M&A companies and how media material may have contributed to the market impacts experienced by the corporates. The liberalisation investment policy initiations by the Indian government lead to rapid growth in outward foreign direct investments between 2000 and 2008. It is interesting to note that India experienced annual average growth of 1399% in OFDIs during the period 2001-2008. Encouraged by the financial reforms, an increase in large scale mergers and acquisitions (M&As) by Indian corporate occurred. The present study examines the performance of Indian corporates involved in the OFDI related M&As. The research is important because it is the first to assess the success of Indian corporates involved in outward foreign direct investments from the short term and long term perspective and across sectors. The thesis fills the gap in the literature in which it examines the aggregate performance and also looks into firm specific level performance. The study links the ownership, location and internationalisation (OLI) theory to the strategies of Indian corporates and discusses how they are aligning with international brands to stand in the international market The short-run performance is assessed using an event method utilising a three-day short-event window surrounding the acquisition announcement period. Various metrics including abnormal returns (AR), cumulative abnormal returns (CAR) and standardised cumulative abnormal returns (SCAR) are analysed. The study adopts event approach to measure the long term performance and includes: CAR, and Buy and Hold Abnormal Returns (BHAR). The study considers parametric and non-parametric tests. The other measures like Wealth Relative and Tobin’s Q are also used. The study considers a maximum 36 months following the acquisition event month. The empirical results showed positive wealth effects to stockholders in the short- and long-term periods and the empirical results supported rejection of the null hypotheses. However, specific firm-level empirical findings showed mixed results in the short term. The variations in the outcomes, such as why one M&A should receive an initial positive market reaction while another adverse market reaction, relate to the individual contexts and how the market assesses the changing return and risk parameters. The study proposed explanations for the variations in outcomes based on prior findings and OLI theory. Drawing on secondary information the study offers explanations for the share market reactions. Commentaries from financial analysts and commentators, and media releases from the company concerning a mooted M&A may impact investors’ assessments of the return and risk parameters for each company. Context is important and the specific characteristics of the Indian companies affect the outcomes. Prior studies undertaken from the context of Indian Internationalisation viewed that Indian firms have the capacity and the ability to compete in the world market. The attributes of Indian firms, which created such capacities and abilities, are embedded in the past and have emerged over a much longer period of time. The motivations for Indian firms’ overseas acquisitions include: gaining access to international markets, firm-specific intangibles, such as technology and human skills, and benefits from operational synergies, to overcome constraints from limited home market growth, and to survive in an increasingly competitive business environment. The rationale for OFDI related M&As by firms is to create value to their investments (Pradhan & Abraham 2004; Kumar 2006; Deepak 2008). The study examined five cases of Indian corporates. It identified that Indian corporates acquired competitive ownership advantages through the OFDI related M&As. For instance, through acquisitions the Indian corporates had the advantage of being local in foreign destinations and avoided the disadvantages of being foreigners in European, UK & US markets. Likewise, by undertaking integrated production networking, the Indian corporates linked the low-end players with the high-end players and were able to draw synergies and deliver value. In other words, the initial processing of raw materials was carried out in India closer to source and then the remaining processes were carried out in the acquired company’s country which allowed them to have access to the technology and also interface with the customers of the acquired companies. The study shows how the synergies occur due to disintegrated model of operations subsequent to the acquisitions. The explanations of the present study are in line with the prior findings. By adding to the prior studies and by integrating empirical research of aggregate results with explanations of the specific firm level, the thesis opens up possibilities for future research.
University of Waikato
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